Punchline

By any other name

Oil 9-2-16, NFP and the 61.8 Fib

currencies, ECB and Fed

SP500, a bull flag by any other name

End of summer doldrums

Fall?

Or up?

Well, overnight (Thursday night), in oil, the 61.8 % retrace of the August up move did hold, but in the sloppiest way yet, in 2016.

The big upsurge came with the Non-Farm Payroll #, which came in worse than expected, 151k jobs vs 180k expected.

This was the news excuse for commodities and indices to move up, at 5:30 am PST. Why? Because worse economic data means less chance of a Fed rate hike in Sept.

Things to note in the oil action:

Price flirted with that 61.8 level, and repeatedly shimmied below it.

The up move away from that level included 3 sharp sell-offs, causing a megaphone formation on the way up

So the move up was certainly more labored than the last two moves down. It was not a clean up-trend reversal. And even though it did take back all of the Thursday down move… on close, it fell back in to the Thursday range, and ended 50 cents below the high, just as Thursday, it ended 50 cents above the low. (50 cents is more than 1 standard deviation…therefore impulsive.)

Since this does not indicate a clean turnaround to the upside, the hypos for Tuesday are already in place. Choppy open. The up bias remains intact above approximately $43.6. (Unless some significant news changes the picture tonight or on Labor Day.)

$ correlation

The truth is, oil was really late to the party, as usual. On Thursday, the dollar was impulsive down, signaling an up pivot for oil. And yet, oil sagged while the dollar bear flagged. (Wag of the finger: Wrong, oil!)

On the NFP announcement, the dollar made the follow through washout to the downside, and oil finally blew its party whistle and surged up.

But look what happened next. The dollar took back the entire NFP washout, and more than 61.8% of the entire down move since Thursday.

So what does this tell us about what will happen, going in to Sept? That we really don’t know.

Currencies and central banks

The fact of the matter is, the dollar is dead center in the middle of its 2 year range, going in to the Sept 8 ECB meeting, followed by the Sept 20 Fed meeting. It’s so dead center, so coiled, it makes a pretty picture.

The big picture bias here is a bull flag. But this is a multi-year bias. It tells us little about the specific next move, this month. (Although the bias is generally up, so we have to keep giving the edge to the bulls, unless other data comes in.)

Fundamentally:

ECB

The Euro zone continues to experience weakness. And the ECB probably would like to loosen policy In Sept further if it could. Draghi is expected to announce that QE will be extended from ending next spring, to ending next fall.

However, the ECB is widely seen to be low on bullets, if not out. They are having a hard time finding bonds to buy, in order to infuse the money they print in to the economy. They are already at negative rates…the limbo bar is cartoonishly low.

The only way the ECB is likely to surprise with a further currency weakening move, is some sort of creative new idea for how to extend central banking policy. But you know, that’s really not how the limbo was intended to be done.

US Fed

The Fed has struggled for a couple of years now to paint a rosy, hawkish picture. But in spite of continually talking about rate hikes, has only managed to raise once, for a quarter of a %.

Although US economic data appears relatively strong, on the international circuit, there is deep suspicion about the repeated massages required to keep US leading the race.

Any weakening by the Euro zone, Japan and the UK makes rate raises by the fed unlikely.

Still, in the big picture, the US looks relatively strong, the dollar likewise, and a significant move up in the dollar looks more likely than down. Whether that likely happens in Sept, the Fall, or early 2017 is not very clear.

As a commodity trader working on a day time frame basis, or even a swing trader with a time horizon of a week or two, the larger picture study of currency relationships gives little clue, except to watch for any significant break from the coiling dollar consolidation.

SP500

In the big picture, the SP500 is clearly bullish, and would be even if it fell out of bed at any moment. And sooner or later, it will fall out of bed.

Although this has a rolly look, and does not look like a nice pennant, it’s still a bull flag. Price moves up, and goes sideways…that’s a bull flag, even if it doesn’t have the Barbie lines.

A move up from here is more likely, and will remain more likely, each time it steps up, until it doesn’t. But moving up is likely to go in small steps, whereas the move down, when it happens, is more likely to cause a big whoosh, as many swing scale (non-investment grade) longs from this range liquidate.

In the very recent picture, the Friday NFP announcement did end a week of one time framing down. So the most likely direction next week is up. (And note how it’s neatly sandwiched between the range steps of the whole summer.)

Summary overview and prognostication

So we enter the 2016 fall, emerging from a historically boring, low range summer, with stocks moving up, in a desultory manner.

Oil and commodities also are in a bullish posture, but only in the way where you think your hero will win, even though he’s been beaten through the whole movie, and the movie is only halfway over. What the next scene will bring could go either way.

Central banks and currencies are equally uncertain. In the macro picture, this is really an exciting and interesting story of our time, since policy envelopes are bursting at the seams. Sooner or later, some explosive result is probable.

And like the SP500, explosive movement is more likely down…whereas up movement is likely step by step, as fiat oxygen thins. However, although economic advancement gets more Sisyphean by the step, there is no real telling how long or how far we can climb.

And maybe we’ll hit a plateau. It’s conceivable we’ll settle up here, just as long ago some ancient Indians must have climbed the Himalayas, surveyed the bleak landscape, called it home, and established Tibet.

However, not likely. The central bankers and the world of big money, and nations and companies seeking economic expansion, all climbed up here fueled by crack and lust. It would take a lot of detox to settle in to a serene contemplative stagflation.